JUDGMENT
H.C. Goel, J.
1. These are two references made by the ITAT relating to the case of the assessed M/s. Delhi Cloth & General Mills Co. Ltd., Delhi for asst. yrs. 1960-61 and 1962-63 respectively.
2. In IT Ref. No. 222 of 1975 relating to asst. yr. 1960-61 made at the instance of the assessed the following question of law has been referred for the opinion of this court :
“Whether, on the facts and circumstances of the case it could be held in law that the assessed-company had concealed the particulars of its income or furnished inaccurate particulars of such income within the meaning of s. 271(l)(c) in respect of which a penalty of Rs. 50,000 levied by the IAC of IT Range III, New Delhi for asst. yr. 1960-61 was upheld by the Tribunal ?”
3. In IT Ref. No. 126 of 1973 relating to asst. yr. 1962-63 made at the instance of the revenue the following question of law has been referred for the opinion of the court :
“Whether, on the facts and circumstances of the case, the Tribunal was legally correct in cancelling the penalty of Rs. 3,41,000 levied u/s. 271(l)(c) of the IT Act, 1961 ?”
4. The assessed is a public limited company doing business in the manufacture of cloth, Chemicals and sugar etc. The total income of the assessed for asst. yr. 1960-61 was determined at Rs. 1,71,15.426 against its returned income of Rs. 1,52,57,976.
5. The ITO while examining the balance-sheet and book of accounts as maintained by the assessed found that the company had maintained in the books an account in the name of Central Marketing Organisation where large sums were debited as expenses. No separate profit & loss account was prepared for this item, nor a separate balance-sheet was prepared. At the end of the year the total net expenses debited to this account were transferred to the different units sold to this organisation. There were also a number of debit items in the cloth department retail stores where debit entries were passed through the said first account. The assessed as per the direction of the ITO furnished fuller details in respect of the total amount of Rs. 60,60,568 debited to the said account. They gave the break-up of the expenditure of Rs. 2,85,717 in respect of the furniture, etc., including the following three items :
Making of furniture Rs. 1,56,699 Remodelling of furniture Rs. 32,431 Fans, and expenses on acquisition Rs. 18,039 of Park Street and College Street depots at Calcutta Rs. 33,000
The assessed claimed the expenditure on making and remodelling of furniture as also on fans as revenue expenditure. In respect of the sum of Rs. 33,000 spent on acquisition of the two new depots at Calcutta, it was missed through an oversight and was not included in the return by the assessed and the assessed surrendered the same for inclusion in its total income. The ITO did not accept the contention of the assessed that the aforesaid expenditure was of revenue nature. In the total income he accordingly added the aforesaid sums of furniture on the cost of fans and the expenditures of Rs. 33,000 as surrendered by the assessed. The ITO held that the expenditure on making and remodelling of furniture and on fans was capital expenditures. The AAC confirmed the three additions.
6. In the second appeal by the assessed to the Tribunal the Tribunal allowed the expenditure of Rs. 32,431 incurred on remodelling of furnitures. The disallowances of the other sums i.e. expenditure on making of furniture, cost of fans and expenses on acquisition of the two deposits at Calcutta were maintained. The ITO in the meantime referred the case to the IAC for levy of penalty on the assessed u/s. 271(1)(c) of the Act. The assessed in reply to the show cause notices served on it by the IAC to show cause as to why penalty be not imposed on it furnished a detailed reply. It was stated that their’s is a big organisation with ten factories and the account of each factory is maintained and kept in the respective places of their operation. The accounts are kept not from the point of view of income-tax but from the point of view of commercial utility and facilities. The Unit Accounts Officer responsible for the compilation of the accounts of the different units probably found that the expenditure relating to the cost of furniture was of be dismantled to refit the two shops and so the amount on the making of that furniture was debited to the account of cloth expenses. It was further submitted that the company’s accounts were duly audited by M/s. A. F. Ferguson & Co. and they also never pointed out if there was any error in the said expenditure being so debited. Further submissions were made that the income-tax matters of the assessed are attended to by a separate department by the head office and while every possible care is taken to scrutinise the account some items escaped attention. It was submitted that the assessed bona fide believed the expenditure in question to be of revenue nature and there was no mistake on its part in debiting the same to the account of cloth expenses although it had been held up to the Tribunal as that of capital nature. Regarding the item of Rs. 33,000 as expenditure on acquisition of Park Street and College Street depots it was submitted that they were not added back by mistake and whenever the mistake came to the knowledge of the assessed they were surrendered and there was no concealment of those particulars of income on the part of the assessed. These contentions did not prevail with the IAC and he levied a penalty of Rs. 50,000 on the assessed u/s. 271(1)(c) of the Act, It was upheld on appeal by the Tribunal.
7. In the asst. yr. 1962-63, the ITO during the course of the assessment proceedings found that the assessed had included a sum of Rs. 1,03,561 as expenses claimed in the Central Marketing Organisation, the details of which are as follows :
Cost of new furniture Rs. 25,207,51 Cost of remodelling of furniture Rs. 71,445.73 Cost of fans etc. Rs. 78.33 Cost of electric fittings Rs. 6,959.74
The ITO added back these expenses disallowing the claim of the assessed that the expenditure in question was of revenue nature. The ITO also added back Rs. 22,028 debited by the assessed allegedly in excess of its taxable income of the Daurala Sugar Works unit. These two additions were reduced in appeal by the AAC to Rs. 73,551 and Rs. 8796 respectively. So far as the expenditure on remodelling of furniture was concerned, the AAC allowed the claim of the assessed to the extent of Rs. 33,000 on estimate basis and treated the expenditure to that extent as revenue expenditure. Rest of the expenditure of Rs. 41,446 was disallowed, holding the same as capital expenditure, holding the same as capital expenditure. In this manner the AAC retained the addition to the extent of Rs. 73,551. Thereafter the penalty proceedings u/s. 271(1)(c) were taken by the IAC to whom they were referred by the ITO.
8. As regards the expenditure of Rs. 73,551, a similar plea was taken by the assessed as was taken in the earlier asst. yr. 1960-61, namely that the expenditure was debited in the name of the Central Marketing Organisation which dealt with units of the assessed and the expenditure was on account of the replacement of old furniture in retail depot and the assessed claimed such an expenditure as revenue expenditure in the past and was under the bona fide belief that the expenditure in question was of revenue nature. As regards the second item of Rs. 22,028 as reduced to Rs. 8,929 on appeal by the AAC, the relevant facts are that the Managing Agent’s remuneration payable by the company was calculated with reference to the net profits of the different units of the assessed. In the relevant previous year the sugar mill had shown a profit while the sugarcane farm had shown a loss. The total commission that was debited to this unit was to be on the basis of the net profit of the sugar mill. The company, however, credited a sum of Rs. 22,028 to the loss account in the farm and made an excess debit to the sugar mill debit of the equal amount. The explanation of the assessed regarding this treatment being given was as follows :
“…. The allocation was made in accordance with the practice followed by the company for the past so many years and since the net profit & loss with regard to the farm account was separately worked out, the adjustment was necessary for showing the results of the working of the sugar mill and the farm separately. In the past when there was a profit in the farm, the proportionate managing agents remuneration was debited in the farm account and as this adjustment was shown in the profit and loss account of the farm, there can be no question of concealing any particulars. Further it was not only in the years when there was a loss in the farm that such adjustments were made and thus it was merely a failure to disclose and it did not pertain to any affirmative action likely to prevent or intended to prevent knowledge of the relevant facts.”
9. These contentions did not prevail with the IAC and he levied a penalty of Rs. 2,41,000 on the assessed.
10. The Tribunal on appeal by the assessed found that the disallowances of Rs. 41,446 and Rs. 6,960 as sustained by the AAC had been deleted by it in the quantum appeal or the assessed. With regard to the expenditure of Rs. 6,960 on account of the replacement of electric fittings the Tribunal in the quantum appeal observed that they were clearly allowable as current repairs. In the penalty appeal of the assessed, the Tribunal accordingly observed that the basis for imposing penalty on account of those two disallowances had thus come to an end and the disallowance of Rs. 25,067 towards the cost of new furniture Rs. 78 as expenditure on fans and wall coffers, etc. and the question of exigibility of penalty in regard to the disallowance of Rs. 8796 debited in excess of the taxable income of the Daurala Sugar Works only remained to be examined. The Tribunal accepted the aforesaid explanation of the assessed and deleted the penalty as levied on the assessed.
11. We have heard Shri G. C. Sharma ld. counsel for the assessed and Shri Wazir Singh, senior standing counsel for the revenue.
12. Now coming to IT Ref. No. 222 of 1975 relating to asst. yr. 1960-61, the first thing to note is that the IAC had rejected the explanation of the assessed regarding its bona fide belief that the expenditure of Rs. 1,56,699 on the making of the furniture could be revenue expenditure and come to the conclusion that the assessed has furnished inaccurate particulars of its income whereby it got its income reduced by an amount of Rs. 2,25,000 including the said sum of Rs. 1,56,699. However, the Tribunal on appeal by the assessed accepted the aforesaid plea of the assessed relating to the said claim of expenditure of Rs. 1,56,699. The Tribunal, however, upheld the penalty order agreeing with the IAC that the penalty was exigible. With regard to the other items of disallowances, namely that of Rs. 18,039 towards cost of fans and of Rs. 33,000 as expenditure on acquisition of Park Street and College Street Depots at Calcutta regarding the inclusion of Rs. 18,039 representing the cost of electric fans, the Tribunal observed that according to law the cost of electric fans had necessarily to be treated as capital cost and the fact that this had made the accounting a very difficult problem for the assessed which was an organisation with far flung depots, did not in any way change the nature of the expenditure or made the responsibility of the company any less exacting. It was also observed that the fact that the auditors of the assessed had passed the accounts without questioning the credit given by the company to the said items did not exonerate the company from its responsibility. Lastly it was observed that so far as the expenditure on fans was concerned, the assessed’s failure to add the amount back to the total income resulted in concealment of income on its part or in deliberately furnishing inaccurate particulars of income and that largeness or far flung nature of the organisation could not be a ground for condoning the omission which an ordinary assessed could not be excused for committing. From these observations of the Tribunal it is clear that the Tribunal did not approach the matter which was a case of the levy of penalty as required by law. The observation of the Tribunal comes to nothing, but that the assessed’s plea that the expenditure in question was of a revenue nature did not have any force and the expenditure had to be treated as capital expenditure and, therefore, the assessed was bound to add the same back to its total income and the fact that the assessed did not so add back that expenditure amounted to the furnishing of the inaccurate particulars of the income by the assessed. It is obvious that the fact that the expenditure in question was capital expenditure in nature and was therefore, liable to be added back to the income of the assessed is quite different from the fact as to whether on the facts and circumstances of the case the assessed could be under a bona fide belief that the expenditure in question was revenue expenditure and for that reason the same was not added back to its total income with the result that no penalty was exigible on that account, are two quite different facts. The aforesaid its bona fide belief about the nature of the expenditure was not duly considered by the Tribunal. The mere fact that plea of the assessed that the expenditure in question was of revenue nature was not a accepted up to the Tribunal, by itself did not mean that the assessed had furnished inaccurate particulars of its income by not adding that back to its total income. The question for consideration was as to whether on the facts and circumstances of the case the assessed could reasonably be under a bona fide belief that the expenditure in question was of revenue nature and having regard to the manner in which the accounts were maintained by the assessed in its Central Marketing Organisation, the expenditure was not added back to its total income or was it so done to conceal the true nature of the expenditure. Before we comment on the merits of the plea of the assessed, it may be stated here that it is a settled law that the mere fact that a claim of expenditure stands disallowed, does not by itself lead to the inference that the assessed had furnished inaccurate particulars in regard to that item. Penalty on account of concealment can be imposed only if there is conscious and deliberate concealment on the part of the assessed. The Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa observed as below :
“An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceeding, and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances.
In that case the question for consideration before the Supreme Court was that even if the appellant assessed, namely, Hindustan Steel Ltd. was found to be a dealer as per the Orissa ST Act, whether on the facts and circumstances of the case, penalty u/s. 12(5) of that Act could still not be rightly levied on the appellant i.e. whether there was sufficient cause for the appellant’s not applying for registration as a dealer under that Act. The above said principle as laid down by the Supreme Court in that case applies with full force in the cases of penalties u/s. 271(1)(c) of the IT Act, 1961 and this view has been consistently taken by the courts. The decision of the Supreme Court in the cases CIT, West Bengal & Anr. v. Anwar Ali , CIT, Madras v. Khoday Eswarsa and Sons and CIT, Kerala v. N. A. Mohamed Haneef are the leading decisions of the Supreme Court on the point at issue and may be read in this connection. Next, it is also a settled law that prior to the insertion of the explanation to s. 271(1)(c) of the Act by the Finance Act, 1964 w.e.f. 1-4-1964 the burden to establish that the assessed had concealed the particulars of his income or had furnished inaccurate particulars of such income lay on the revenue. The matter was required to be examined in the light of the above said legal position. Now when the case of the assessed is examined in the light of this legal position, we are of the view that the revenue had not been able to bring home the charge of concealment of income or of furnishing of inaccurate particulars of income by the assessed. As regards the expenditure of Rs. 18,038 representing the cost of electric fans the assessed’s case has been that their’s was a big organisation having 10 factories located in different cities of the country; their accounts were compiled in one organisation called the Central Marketing Organisation which was the practice being followed by the assessed company for the last number of years and without any objection thereto by the department; the assessed had innumerable depots i.e. retail cloth shops like the two shops acquired by it at Calcutta in the previous year relevant to the assessment year in question the assessed had continuously to change its shop fittings. It was not quite possible for them to get track of small items of expenditure incurred on shop fittings. According to the assessed even fans were a small item in a big organisation as that of the assessed and the assessed had been treating the expenditure incurred on furniture provided in its retail shops as also on electric fans provided therein during the past years and the same was being allowed as such. None of the submissions of the assessed were shown by the departmental authorities to be factually incorrect. In fact, the Tribunal accepted the plea of the assessed that so far as the expenditure of Rs. 1,56,699 incurred towards providing of furniture was concerned, the assessed could be entertaining a bona-fide belief that the same was revenue expenditure. The other facts to be taken note of are that the fans were provided in the retail shops which did not belongs to the assessed and were taken by the assessed on rent. This is not the case in which the assessed had not disclosed the expenditure in question at all, but is a case in which the assessed had wrongly classified the expenditure i.e. having shown and treated the same as revenue expenditure and of course without inviting the specific attention of the ITO to that question. It is also to be noted that the assessed would have got rebate to the extent of 25% of the cost of fans if the expenditure was to be treated as capital expenditure. Thus on a totality of the facts and circumstances of the case it does not appeal to us that the omission on the part of the assessed in not adding back the expenditure of Rs. 18,039 in question or in not drawing the pointed attention of the ITO regarding the true nature of that expenditure was deliberate and dishonest and that it was an attempt on the part of the assessed to conceal its income or to furnish inaccurate particulars of its income in so far as the expenditure in question was not added back by the assessed. As regards expenditure of Rs. 30,000 representing the amount spent on the acquisition of Park Street and College Street Depots at Calcutta also we are of the view that the revenue was unable to make out a case on which it could be held that the omission to add back that amount to the income of the assessed originally was a design on the part of the assessed to conceal particulars thereof having regard to the totality of the facts and circumstances of the case as mentioned above and including the fact that the accounts of 11 units of the assessed were complied in the Central Marketing organisation of the assessed. There could be a lapse on the part of the Accounts Officer at the Calcutta branch of the assessed in placing the full and true facts of that expenditure to the Central Marketing Organisation of the assessed. The assessed surrendered this amount for being taxed immediately on the same coming to light.
13. In conclusion we hold that no case for levy of penalty u/s. 271(1)(c) was made out and we accordingly answer the question referred in the negative, i.e. in favor of the assessed and against the revenue.
14. As regards IT Ref. No. 126 of 1973 relating to asst. yr. 1962-63, the matter does not present any difficult. We have already held above in IT Ref. No. 222 of 1975 that on the facts and circumstances of the case it could not be said that the revenue had made out any case for holding that the not adding back of the expenditure of Rs. 18,039 in respect of the purchase of electric fans was a deliberate act to conceal the true nature of that expenditure. The position regarding the expenditure of Rs. 25,067 in respect of the furniture and racks incurred by the assessed, as also a sum of Rs. 78 in respect of the fans and wall coffers in the year 1962-63 is similar to that of the expenditure incurred in respect of the electric fans in the year 1960-61. The approach of the Tribunal in considering the question of exigibility of penalty with regard to these items as also the conclusion arrived at by the Tribunal are proper and reasonable. The conclusion as arrived at by the Tribunal could not be said to be erroneous in law. As regards the expenditure of Rs. 8796 the Tribunal accepted the explanation of the assessed as mentioned by us above to be reasonable. It was observed by the Tribunal that it could not be said that the assessed was guilty of suppression of material particulars of its income in the income-tax proceedings in so far as it made adjustment of the remuneration of managing agents from the farm loss and that in view of the facts and circumstances relating to this adjustment in conformity with the assessed’s practice in the past, they were unable to share the view of the IAC that there was any obligation cast on the assessed to reverse the entries of adjustment while submitting income-tax returns and/or that their failure to do so was a willful act on the assessed’s part. We find no error of law in the approach of the conclusion of the Tribunal. We accordingly answer the question referred in IT Ref. No. 126 of 1973 in the affirmative i.e., in favor of the assessed and against the department. On the facts and circumstances of the cases, we make no order as to costs.